RBI releases report on review of liquidity management framework

The Reserve Bank of India (RBI) has released a report on liquidity management framework submitted by an internal working group that was set up to help the central bank manage system liquidity more effectively.

The framework, if revised, will have an impact on the flow of credit to various sectors in the economy. This includes the transmission of policy rate changes to the money market rates.

The working group has recommended largely maintaining the present corridor system with call money rate as the target rate. However, it has suggested making it more flexible to adapt to the needs of the system, when it is in deficit or surplus mode.

“Minimizing the number of operations should be an efficiency goal of the liquidity framework. Consequently, there should be ideally one single overnight variable rate operation in a day, supported by fine-tuning operations, if required,” the report said.

Also, the current requirement of maintaining liquidity provision at 1 percent of net demand and time liabilities (NDTL) would no longer be necessary as the framework would meet the system’s entire liquidity needs.

The group has recommended using tools like longer-term repo operations, in addition to open market operations (OMOs) and forex swaps to manage liquidity in the system.

“The daily dissemination through Money Market Operations (MMO) press release should be improved by including the ‘flow’ impact of liquidity operations. To improve transparency, quantitative assessment of durable liquidity conditions of the banking system may also be published,” the report said.

The RBI’s management framework was last reviewed in 2014. The central bank had decided to initiate a fresh review in June this year. The report was initially expected to be submitted by mid-July.

The RBI has invited public feedback on the working group’s recommendations by October 31, 2019.